25 February 2017

Cobalt and other resource scarcity stories

Various natural resources have been popping up in so called business news in these first weeks of 2017. As the world economy gets up to gear again, the struggle of Man against the finiteness of planet Earth becomes salient once again.

Overnight, an obscure metal seems to be setting an entire industry into peril. As remarkable as the news itself is the lagging response of the mainstream media to these matters, apparently only able to report on resource constraints only in the face of acute scarcity.

Copper is a relatively well followed resource by economists and journalists. It is so ubiquitous in modern technology that provides an accurate gauge of the broader economic performance. Therefore many were paying notice when one of the largest mines of this metal was brought idle by a massive strike.

The dispute at the BHP Billiton mine, which produces around 1.2m tonnes of copper a year, is the latest fillip for a metal that last year underperformed the likes of zinc and iron ore until Donald Trump’s unexpected US election victory. The prospect of the White House launching a major burst of infrastructure spending, as well as signs of resilience in the Chinese economy, have pushed the copper price up 13 per cent since US election day.

[...] With more than two thousand workers striking over pay and benefits, the price for copper — whose role in wiring makes it a key global commodity — has been pushed higher after BHP late last week declared force majeure on copper contracts from the mine.

Analysts say the strike is also drawing attention to the potential for supply disruptions elsewhere in the copper market which, after five years of falling prices, has seen little investment in new supply.

For the time being, copper is not at the front line of resource scarcity. However, many of the constrained metals extracted in lower volumes are actually by-products of copper mines. Eventually, Escondida brought to the fore some of these limited resources.

I last wrote about silver in the beginning of December, noting various information fragments that point to an imminent extraction peak. From the beginning of the year up to now, the price of the super-conductive metal has risen 17%. While still far from the flash highs of 2011, this could still become a memorable year for silver.

This week the Financial Times published a story on cobalt including all the ingredients of a full blown resource scarcity crises: relentless price hikes, hoarding investors and threatened industries.

In a bold wager on higher prices, half a dozen funds, including Swiss-based Pala Investments and China’s Shanghai Chaos, have purchased and stored an estimated 6,000 tonnes of cobalt, worth as much as $280m, according to the investors, traders and analysts.

The stockpile is equivalent to 17 per cent of last year’s global production of the metal.

[...] The price of cobalt, which is mined almost exclusively in the Democratic Republic of Congo, has jumped more than 50 per cent since November to $21 a pound and could rise further. Prices rose to peak at about $50 a pound in 2007, before dropping to a low of $10 in 2015.

I was not exactly expecting these news to come on cobalt first, but a resource scarcity story like this was inevitable. Governments have understood the importance of maintaining strategic reserves of petroleum and gold, but are yet to create mechanisms to deal with scarcity of most other resources. Episodes like the one lived today with cobalt are certain to repeat with other metals too; lithium is another candidate.

The implications for the electric car industry are deep. Car manufactures seem to be targeting a price tag of 40 k€ per unit. Even though this is about twice the price of a conventional car, they expect such figure to buy in the upper middle class in wealthier economies, hiking sales figures to the millions. The question is the impact of such high sales on the price of raw materials.

I remain sceptical of the electrical car concept based on present day technology. It seems some sort of leap is still required towards less resource thirsty designs for fully electrical automobiles to reach the worldwide masses. At this stage, focusing on designs that improve the efficiency of internal combustion engines, such as hybrid drive-train or self-driving technologies, appear more sensible.

I reckon my thinking goes against state of the art market wisdom. But it are not just these resource scarcity episodes that lead me here. Take for instance the example of Tesla, that darling of the "business" press. The company sold 80 thousand cars last year, but a combination of frenetic trading and journalistic marketing has pushed its value in the stock exchange to over 40 G€. Tesla is now more valuable than Nissan, for instance, a company that sells 5.5 million cars per year.

Tesla keeps loosing money, and will soon need to raise more capital to keep operating, but imagine for a moment that it starts earning a whopping 1 k€ on each cars it sells. This would translate into a price to earnings ratio of 500. That means it would take 500 years for cumulative earnings to equal the value of the stock.

These brief figures on Tesla serve only to illustrate how ingrained is in the business community the assumption that resources are infinite. Hard lessons are there to be learnt on exponential growth, just as many are learning now with cobalt.